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If you want to get rid of your student debt, but don’t have the money to pay off your student loans in full, these 7 ways can help you pay off your loans faster. (Shutterstock)
Worried about graduating with student loan debt? You’re not alone. Students graduating with a bachelor’s degree from a borrowed public college or university $26,100 in student loans on average, according to the National Center for Education Statistics. This figure is even higher for students at private non-profit and for-profit institutions.
The good news is that it is possible to pay off your student loans and save money.
Student loan refinancing could be an option to help you pay off your loans faster. You can learn more about refinancing student loans by visiting Credible, where you can compare rates from several private student lenders.
1. Understand all your debts, then make a plan
Many people leave college with multiple student loans, including federal and private student loans. Your first step should be to figure out how much you owe so you can make a plan.
To find out the amount of your federal student debt, log on to your StudentAid.gov Account. Here you will find the current balance, interest rate, loan manager and payment schedule for each loan.
To gather information about your private loans, you may need to call your loan manager to get details about your loan balance, interest rate, and payment schedule. If you don’t know who your service agent is, check your original loan documents, ask your university’s financial aid office, or check your credit report.
Once you’ve gathered information about each loan, create a spreadsheet with all of your loan details.
2. Consider consolidating or refinancing
consolidation or refinance your student loans combines multiple loans into one monthly payment with one servicer. So what is the difference?
Consolidation consolidates all or part of your federal loans into one Direct Consolidation Loan. Consolidation does not lower your interest rate — your new rate will be a weighted average of all your consolidated loans, rounded to the nearest eighth of a percent. Fortunately, the new loan will have a fixed interest rate, so your loan payment won’t increase if interest rates go up.
Refinancing combines all or part of your federal and private student loans into a new loan with a private lender. Refinancing can allow you to lower your interest rate or lower your monthly payment by extending your repayment term. Your new interest rate can be fixed or variable.
Remember that refinancing federal student loans to a private loan means losing many benefits of federal student loans, including income-based repayment plans, loan deferment, forbearance, and loan forgiveness. students.
You can easily compare prequalified rates from several lenders using Credible.
3. Stick to a budget
Setting (and sticking to) a budget is one of the most important things you can do to develop good financial habits and pay off your student loans quickly.
Although many effective budgeting methods are available, the 50/30/20 rule is the most common. This budget approach suggests that you distribute your monthly net salary as follows:
- 50% toward needs (housing, groceries, utilities, transportation and minimum debt payment)
- 30% towards desires (restaurants, streaming subscriptions, entertainment)
- 20% savings (retirement account contributions, emergency savings and investment)
When you use the 50/30/20 rule to pay off student loan debt, your minimum payments fall into the need category so that you don’t miss your loans and negatively affect your credit score.
Any additional student loan payments fall into the category of savings because once your debt is exhausted, you can put that money towards savings.
Keep in mind that the 50/30/20 rule is only a guideline and you may need to modify these categories to suit your particular situation.
4. Decide between snowball and debt avalanche methods
Debt Snowball and Avalanche are strategies for paying off your debt, assuming you have decided not to consolidate or refinance your loans.
Under the debt snowball method, you pay off your debts in order of size, from smallest to largest. You make the minimum payment on all debts and allocate any additional principal payments to the loan with the lowest balance. Once you’ve paid off that loan, you focus on the next smallest balance, repeating this process until you’re out of debt.
Under the debt avalanche method, you pay off your debts according to their interest rates, from highest to lowest. You make the minimum payments on all loans, but allocate any extra money to the loan with the highest interest rate.
The avalanche method is the most efficient way to pay off your student loans because it minimizes the cost of debt. However, many people find the frequent debt snowball method milestones more motivating.
5. Pay more than the minimum payment
Federal student borrowers are automatically enrolled in a standard repayment plan with a repayment term of 10 years. If you want to pay off your student loan in less than ten years, you will have to make additional payments on the principal of the loan.
You can do this by paying extra with your monthly payment or by sending a lump sum whenever you have funds available.
You can also make an additional payment each year by switching to bi-weekly payments. When you make payments every two weeks, you make 26 half payments per year instead of the 12 monthly payments you would normally make. For this strategy to work, you need to make two halves of your payment before the due date.
Whichever method you choose, make sure that your additional payments are allocated to the principal of the loan rather than the prepayment of interest. Your loan manager should be able to tell you how to make principal-only repayments.
6. Set up automatic payment for an interest rate reduction
Federal student lenders and some private lenders offer a slight reduction in the interest rate if you sign up for automatic payments – usually 0.25%.
While this discount won’t make a huge dent in your debt, every dollar counts when you’re trying to pay off your student loans faster. Plus, it’s a good way to make sure you’re never late with your payments.
7. Stay on the Standard Refund Plan
Federal student loans offer income-oriented repayment plans, which limit your monthly payment to 10% to 20% of your discretionary income. These plans are useful if your monthly payments are too high compared to your income, but they are not the best choice if you want to get out of debt quickly.
Income-driven repayment plans often extend your repayment period and increase the amount you’ll pay in interest over the term of the loan.
If you want to pay off your student loans faster, consider staying on the standard repayment plan, which guarantees that your loan balance will be paid off in 10 years.
To start refinancing your student loans, visit Credible and compare prequalified rates from several lenders.